Remember What Happened in 2001?

With the outbreak of huge financial turmoil of Turkey in 2001, we saw Turkish lira dramatically depreciates against other currencies in nine consecutive days. Even though some dissimilarities exist between today and 2001, the recent moves in Turkish Lira as same as they were 12 years ago.

Turkish lira weakens ninth day against Dollar, and this is the longest losing streak since 2001. The more terrifying thing is that, even though the Central Bank Turkey reduces the amount of one-week repos, cuts one-month repo funding by one billion liras, leads the cost of funding to increase and verbally intervenes with its statements mentioning no way for easing, the lira keeps on tumbling.


My words should not be considered as a call out for a crisis, but still, following the horrible inflation announcement, analysts simply forecast a less than expected growth and a higher than expected inflation. In other words, this has a potential to turn into a stagflation, according to Introduction to Macroeconomics books.

Things are likely to get ugly.

Turkey Inflation Beats Expectations

According to data released by the Statistics Office this morning, headline CPI was up 1.8% mom, compared to the consensus forecast of 1.25% mom. Meanwhile year-on-year headline inflation is up to 7.71%, quietly higher than CBT’s target.

Food price inflation surprised the market on the upside, remaining at 11.4% yoy in October, which is the main component of the calculation. In addition, core items (excluding food, energy and tobacco) was up to 7.5% year-on-year inflation in October, comparing to %7.0% in September.

The outlook for price stability is highly negative in my opinion.

Turkey Inflation Chart 1 - Headline & Core Inflation for the last 10 years and the trendline

Turkey Inflation Chart 2 - Food Prices

The recent depreciation in Turkish Lira will drive the CPI higher.

Well, actually I do not know how but the projected inflation rate by the Central Bank of Turkey at the end of 2014, which is 5.3%, as well as the market sees this as an impossible target to reach.

More tightening should be expected by the CBT to support the Turkish Lira. As a result, it is likely to see higher interest rates both in money market and credit market. Another is important is that, we might see an increase in the total amount of FX deposits in banks, while total amount of TRY deposits dramatically falls. These worrisome developments in the inflation side might be in the FI market in double time, as USDTRY hit 2.02 this morning.